The wage and output data for both the states and metropolitan areas come from
the U.S. Bureau of Economic Analysis (BEA) and the U.S. Bureau of the Census,
with missing data estimated by Economy.com. The labor compensation measure used
is total wages and salaries by place of work, divided by total employment in
each industry. Productivity per worker for metropolitan areas is estimated by
applying the 1992 ratio of metropolitan to state level productivity to the gross
state product release of the BEA. This ratio is calculated using data on
revenues and costs obtained from the 1992 Economic Census.

Since relative regional economic growth is most influenced by enhancing local
production of exportable goods and services, industries predominantly driven by
local demand have been excluded from the analysis. These industries are
primarily retail trade, construction, real estate, many service industries, and
the government sector. In order to compare different regions properly,
Economy.com constructed separate indices of worker productivity and earnings per
worker for each metropolitan area, covering employment for each export industry
at the three-digit Standard Industrial Classification level. However, a measure
that used the aggregate output and earnings per worker would be biased by the
region's industrial composition. Thus, the index of unit labor costs
re-aggregates productivity and compensation per employee, using the national
share of employment in each industry as the weights. This adjustment is
necessary because certain industries have higher output per earnings ratios, due
to the occupational mix of its employment and the capital structure of its
operations. For example, productivity in the automotive industry is extremely
high compared to other industries, whereas in the textile industry it is
relatively low. As a result of these industry differences, a region with a high
proportion of automotive manufacturing will appear to have lower unit labor cost
than a region concentrated in textiles. However, by using the national share of
employment in each industry to weight the productivity for each region, the
index avoids this industry composition bias.

Employment composition is based upon SIC employment classifications. Economy.com
uses three-digit SIC data in order to gauge the regional industry mix properly.
However, since data in industries with a particularly small number of employees
are subject to a higher degree of inaccuracy, a minimum size of 100 employees
was imposed on the index. If the industry had fewer than the necessary 100
employees in the metropolitan area, then the relevant state labor cost measure
was used.

The formula below is used to calculate Economy.com's wages and salary and
productivity index for any level of aggregation, which weights each three-digit
SIC equally for each area, with national employment share for each year serving
as weights. This composition-adjusted aggregate is then indexed by the
appropriate state earning or productivity measure. Labor costs are then
calculated by dividing the earnings index by the analogous productivity index.
The unit labor cost index was created for each year by dividing the region's
unit labor cost index by the national unit labor cost index.